Understanding S-Corporation Officer Taxes
As an s-corp entity or an LLC taxed as an s-corp, the shareholder(s) are considered employees of the entity in the eyes of the IRS and as such are supposed to pay the shareholder/employees a reasonable W2 salary/wage for the work they perform for the entity. This reasonable salary is subject to payroll taxes like Social Security, Medicare & employer matching Social Security/Medicare + Fed Unemployment & State Unemployment. The reasonable salary that you establish is part of your total income and something that you set either in consultation with your CPA often to insure compliance. Any remaining profit from the corporation at year end is something that passes through to the shareholder(s) via a K-1 statement each year and/or is distributed to the shareholders during the year. This K1 income is not subject to payroll taxes, but is still subject to individual Fed/State income taxes. This is an alternative to say being taxed as a sole proprietor or single member of an LLC in which all the profits from the LLC would flow down to the individual and become subject to self-employment taxes. Self-employment taxes by the way are the equivalent of social security/medicare & employer matching social security/medicare.
Thus to start, part of the s-corp compliance requirements is to pay the shareholders a reasonable salary each year and that the payroll taxes & reporting from that process are filed timely. This is where ASAP comes in to assist. We insure that your payroll tax filings are maintained in compliance for you. This means we calculate your payroll tax liabilities based on the salary you've determined is reasonable along with any special items such as a 2% shareholder health reporting, Personal Use of Company Car fringe benefits, retirement deductions (401k) and then pay those tax liabilities to the IRS & State agencies timely. In addition, we file any payroll required tax returns for your entity ever if you had no liability for a period of time as the agencies still require a "zero" return during quarters when no wages were paid out.
Here is a list of the returns or steps we take on your behalf to cover your payroll compliance requirements:
IRS 941 - quarterly
IRS 940 - annually
Colorado UITR - quarterly
Colorado DR 1094 - weekly, monthly, or quarterly
Colorado DR 1093 - annually w/ W2 copies
W2 copies for your employees
W2/W3 submission to SSA - annually
Colorado Local Taxes: Denver OPT, Aurora OPT, Glendale OPT, Greenwood, & Sheridan OPT
New Hire Reporting: we submit newly hired employees to the state as required
Other States & localities: If you operate outside of Colorado, we also file many other payroll related returns to keep you compliant. For a complete list across the 50 states; please contact your account manager.
Copies of returns are available in the secure Client Portal
IRS & State Notices in the mail: Since your entity is registered as an employer with the State Dept of Revenue & State Dept of Labor, you'll get periodic mailings from those agencies and even the IRS detailing your responsibilities or even providing blank forms or instructions. Feel free to share anything with ASAP by scanning & emailing the forms to us or faxing to 970-728-6848 (we do not need originals). We can review these for you and help you understand on a case by case basis what all the letters are stating and help relieve any worries by alerting you if that is a form we already are processing or have received a copy of directly. If you ever see anything with a penalty or dollar amount owing, those are certainly something we want to see promptly.
Do I still need to make quarterly estimated tax payments? Possibly. Quarterly estimated tax payments are individual tax payments that the IRS instructs taxpayers to make to avoid penalties for underpayment of taxes. The IRS is okay with those estimated income tax payments being made via mail with a 1040-ES coupon or you can set yourself up to pay online. However, payroll income tax withholding which is reported on a W2 also is allowed to offset those estimated tax payments. You can instruct ASAP to withhold a specific target amount for Fed and similarly State income taxes out of your salary payments to accommodate this.
What if I don't think I'll owe as much as last year? While most tax return software and CPA's will give taxpayers coupons & instructions to make payments based on the prior year return to avoid penalties, if your income is expected to be significantly lower you may not owe as much as in year's past. However, to calculate your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. The IRS provides a worksheet in the 1040-ES packet to assist in this, but often this turns into work a CPA would provide for their clients. ASAP isn't your income tax preparer or CPA, so we can't really assist in this type of estimation. You can give us your prior year income tax figures from your 1040 to use as your target, but that is the simplest method and doesn't take into consideration your actual current year situation. Estimated state income tax payments follow a similar methodology.